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MDM - Model switches to SELL on October 6, 2014

Published:

6 Oct 2014 13:55 ET

MDM has switched to SELL. The current bounce on two days of diminishing volume and the 50dma act as headwinds. Further, with Fed QE tapering almost finished, QE3 ends this month with the final tranche of $15 billion. When QE1 and QE2 ended, this caused fairly substantial corrections in the stock market until the next cycle of QE began. Thus even though the S&P 500 has not corrected more than 6.1% since January 2013 when QE3 began, technical signs are showing this current correction could get worse. The S&P 500 and NASDAQ Composite stand at around 2-3% off their highs.

The Fed's hands are tied as they realize they must keep rates unusually low for a prolonged period until the economy starts to gain traction. While there are small signs the economy is improving, and history shows the market tends to have a substantial correction within 6 months of the Fed doing their first rate hike, the Fed remains dovish toward easy monetary policy since they know some of the economic indicators (CPI, unemployment, etc) are not telling the whole story. Thus expect some form of QE4 in the future. But until that happens, the market will lack support from quantitative easing as QE3 finishes its course this month. Volatility was elevated after QE1 and QE2 ended due to the market correcting, so the model's signals may be shorter lived than normal since the market rises slowly but falls energetically.

Suggested ETFs:

1-times inverse

RWM - Russell 2000 small cap 1x bear. It should approximate 1x the inverse of the Russell 2000.